“Student loans: Coalition plan branded ‘crazy'”

Coalition plans to penalise graduates who repay their student loans early were today branded “crazy”.

CentreForum, the liberal think-tank, said proposals to charge graduates additional fees for making upfront repayments were overly bureaucratic and would fail to save taxpayers’ money in the long term.

In a report, it was also claimed that the move would hit poorer students hardest and represented a “tax on debt aversion”.

The comments were made as the Government continues to consult over proposals to shake up the system of student fees and loans in England.

Under plans, students can be charged up to £9,000 a year for a degree and the majority of undergraduates are expected to fund courses by taking out Government loans.

Graduates will be forced to repay a fixed proportion of their income when earnings hit at least £21,000 and tiered interest rates will ensure the richest pay the most.

Ministers are now considering the possibility of hitting former students with fines if they repay their student loan early by making larger monthly payments or clearing the debt with one lump sum.

But a report into the proposals published today suggests that the move would be difficult to administrate and leave more debt on the Treasury’s books.

It also said that it would fail to hit the super-rich as they bypass the loans system entirely. Research shows that the majority of people making early repayments were low-earners aged around 25 or under, the study warned.

“It is possible that a 25-year-old earning £18,400 has just inherited a fortune, or that they have rich parents,” it added. “But it is more likely that these are people who are simply debt averse, and wish to pay off their loans as and when they can, whether or not it makes sense in narrow financial terms.

“Given the sorts of people who choose to repay money early, an early repayment charge would be a tax on debt aversion as much as anything.”

CentreForum researchers Tim Leunig and Gill Wyness, who wrote the report, said: “Introducing a system of early repayment penalties for affluent graduates, or those who pay off large chunks of their loans, is crazy.

“If the Government wants to protect the progressivity of the student loan system, it should actively discourage low income graduates from making early repayments, since they will almost always lose out from doing so.”